The first and oldest article is from Reuters of July 22nd titled “Analysis: R.I.P. forward guidance: Inflation forces central banks to ditch messaging tool”. The article is referring to central banks and their guidelines or projections of interest rate changes in the Fed Funds Rate or equivalent central bank rates for other countries. For many years central banks have given a longer term estimate of rates changes. Since June of this year, the Federal Reserve has stepped away from that policy when they raised rates by 75 basis points (bp). Previously they had said they expected 50 bp increases for some time. Instead they raised it 75 bp. Other central banks have raised their equivalent funds rates by wildly differing amounts from their stated goals. This goes back to the old saying, don’t telegraph your plays if you don’t want the opponent to sack your quarterback. The our team in this is the Federal Reserve, the opponent is the stock market/investors and the sack is the ability of the Fed to influence inflation rates. We talked about the market anticipating changes and therefore the change not having the same punch. The Fed and other Central banks have given notice they are no longer going to telegraph their plays. The outcome will be greater volatility in all interest rates and the markets (much wider and wilder ups and downs). The Fed’s hope is that they will have a greater impact on inflation. Again, remember that the Federal Funds Rate which the Fed controls is not a finely crafted and precise economic instrument that the Fed can wield with dexterity, grace and fine precision (regardless of what some in the media, talking heads, and governmental officials may suggest). It is a massive, unwieldy, gross (meaning large and ungainly), ugly (meaning exactly that) blunt force trauma inducing massive piece of economic plate iron. It is about as finely controllable as trying to hit a large, ugly rat (inflation) on a sidewalk by dropping it from a 10 story building onto that same busy sidewalk. The goal is to get the rat and miss the people, streetlights, cars, prams, butterflies and in fact the sidewalk. You will likely get the rat after a number of drops but,…. you will not be able to avoid the non-combatants (i.e., all the non-rat things) regardless of the precision of the drop. Now the governmental response to all this. From July 24th Reuters article titled,
“U.S. economy slowing but recession
not inevitable, Yellen says”. “I’m not
saying that we will definitely avoid a recession,” Yellen said. “But I think
there is a path that keeps the labor market strong and brings inflation down.”
Some of the current debate is if we
have entered a recession now or not. That kind of thinking is dangerous for the
current administration who claims to have things under control or moving in the
right direction or improving or something. You may have heard something about
redefining what is a recession. The only ones who can declare recession or end
of recession is the independent private research group tasked with that job.
Governmental administrations try to influence public opinion and other groups
but that is all it is, attempted influence.
The last article is from CNBC of
August 3rd. “Fed’s Bullard sees more interest rate hikes ahead and
no U.S. recession.” That is the great goal, increase the interest rate (Fed
Funds Rate) which will slow inflation, which is running at 9.1%, and do that
with no recession. And if we really are in trouble we can try to adjust the
definition of recession. Quoting from the
article.
“St. Louis Federal Reserve
President James Bullard said Wednesday that the central bank will continue
raising rates until it sees compelling evidence that inflation is falling.” …“We’re
not in a recession right now. We do have these two quarters of negative GDP
growth. To some extent, a recession is in the eyes of the beholder,” he said.
“With all the job growth in the first half of the year, it’s hard to say
there’s a recession. With a flat unemployment rate at 3.6%, it’s hard to say
there’s a recession.”
Again, pick and
choose your variables (a very econometric way to do things) and highlight what
appears important to make your case which is not unreasonable but you as the
reader need to be aware of what is being said and not said by such statements.
Bullard is laying out some hard “facts” while not saying just when they will do
things (no play telegraphing). The Fed sees the large, ugly rat on the sidewalk
(inflation). They tell us they are now focused on the rat. They have their tool
to deal with it which many imply is an elegant piece of economic equipment and
they are willing to employ it with all the finesse of the large piece of plate
iron it is. Elegant no, effective, likely. We are also told they will use it
several times, as necessary, to get this rat. You (the public) may be assured
and comforted. That is especially true if you like large plate iron induced
headaches.
So gentle reader, do I think we are
in a recession? The National Bureau of Economic Research (NBER) will look at
the data, after the fact, and declare if there has been one. No one else can do
that. The more important questions are how will inflation, shortages, supply
chain bottlenecks, wages, job stability and the host of every day, individual
and personal impacts affect our ability to grow, love, learn, help, serve and
enjoy life and loved ones. I don’t know about a recession by the definition but
I do know I need to take time for the more important and personal challenges
and opportunities around me. We have had recessions before, we will have them
again. Let’s get on with living and doing the best we can under the
circumstances.
Articles quoted / cited:
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